Recent Trends in Interbank Cash and Foreign Exchange Markets Amid Economic Developments

Interbank Cash Market (IBCM)

1. Transaction Volume:
   • June 2024: Transactions totaled TZS 1,277.6 billion.
   • Previous Month: Transactions were TZS 1,581.2 billion.
   • Change: The transaction volume decreased by TZS 303.6 billion, which represents a decrease of approximately 19.2%.
2. 7-Day Transactions:
   • Percentage of Total Turnover: 37.6%.
   • This indicates that a substantial portion of the total transactions in the IBCM was concentrated in 7-day instruments, highlighting their dominance in the market.
3. Interest Rates:
   • June 2024: The overall IBCM interest rate was 7.36%.
   • Previous Month: The rate was 7.34%.
   • Change: There was a slight increase of 0.02 percentage points, or approximately 0.3%.

Interbank Foreign Exchange Market (IFEM)

1. Market Participation:
   • Increased Participation: Attributed to increased foreign exchange inflows from tourism, gold exports, and cash crops.
2. Net Sales:
   • Bank Sales: The Bank sold USD 0.25 million on a net basis.
   • Commercial Bank Sales: Commercial banks sold USD 7.7 million.
   • This indicates higher selling activity by commercial banks compared to the central bank, reflecting greater liquidity in the market.
3. Exchange Rate:
   • June 2024: The shilling traded at an average rate of TZS 2,626.07 per USD.
   • Previous Month: The rate was TZS 2,599.05 per USD.
   • Change: The shilling depreciated by TZS 27.02, or approximately 1.0% compared to the previous month.
4. Annual Depreciation:
   • Annual Depreciation: The shilling depreciated by 12.5% compared to the same month in the previous year.
   • This indicates a significant annual weakening of the shilling against the US dollar.

Figures Recap:

• IBCM:
  • Total Transactions: Down from TZS 1,581.2 billion to TZS 1,277.6 billion.
  • 7-Day Transactions: 37.6% of total.
  • Interest Rate: Increased from 7.34% to 7.36%.
• IFEM:
  • Net Bank Sales: USD 0.25 million.
  • Net Commercial Bank Sales: USD 7.7 million.
  • Exchange Rate: Increased from TZS 2,599.05 to TZS 2,626.07 per USD.
  • Annual Depreciation: 12.5%.

Tanzania’s economic development, Interbank cash and foreign exchange markets

Interbank Cash Market (IBCM)

1. Transaction Volume Decline:
   • Decrease in Transactions: The significant drop in transaction volume from TZS 1,581.2 billion to TZS 1,277.6 billion suggests a contraction in market activity. This could indicate reduced liquidity or less demand for short-term funding in the banking sector, potentially reflecting broader economic uncertainties or tightening financial conditions.
2. Dominance of 7-Day Transactions:
   • Market Preferences: The dominance of 7-day transactions (37.6% of total turnover) indicates that short-term financing remains a key component of the market. This preference might suggest a cautious approach by banks, possibly due to uncertainty in the economic outlook or a need for flexibility in their liquidity management.
3. Interest Rate Trends:
   • Slight Increase in Rates: The small increase in the overall IBCM interest rate from 7.34% to 7.36% reflects a marginal rise in the cost of short-term borrowing. This might be indicative of tightening monetary conditions or a response to inflationary pressures, which could affect borrowing costs for businesses and consumers.

Interbank Foreign Exchange Market (IFEM)

1. Increased Foreign Exchange Inflows:
   • Source of Inflows: The increase in foreign exchange inflows from tourism, gold exports, and cash crops highlights a positive aspect of Tanzania’s economic performance. Strong foreign exchange inflows from these sectors can support the country’s balance of payments and strengthen its foreign reserves, which is beneficial for economic stability.
2. Net Sales and Market Activity:
   • Commercial Bank Sales: The significant net sales by commercial banks (USD 7.7 million) compared to the central bank’s net sales (USD 0.25 million) suggest robust activity and possibly increased demand for foreign currency. This could be related to higher import demand or foreign investments.
3. Exchange Rate Trends:
   • Shilling Depreciation: The depreciation of the Tanzania shilling from TZS 2,599.05 to TZS 2,626.07 per USD, along with a 12.5% annual depreciation, reflects a weakening currency. This could be a result of various factors, including trade imbalances, inflationary pressures, or capital flight. A weaker currency can impact import costs, inflation, and overall economic stability.

Implications for Economic Development

1. Liquidity and Monetary Policy:
   • The decline in IBCM transaction volumes and the slight rise in interest rates suggest that liquidity conditions in the banking sector are tightening. This could influence economic growth by making borrowing more expensive and potentially slowing down investment and consumer spending.
2. Economic Activity and Exchange Rates:
   • The increased foreign exchange inflows from key sectors are positive for Tanzania’s economy, indicating strong performance in tourism, exports, and agriculture. However, the depreciation of the shilling could lead to higher import costs and inflation, which might affect consumer purchasing power and economic stability.
3. Inflation and Investment Climate:
   • A weaker currency and higher interest rates can contribute to inflationary pressures, which might affect the cost of living and business operations. This could impact the overall investment climate, influencing both domestic and foreign investment decisions.
4. Policy Adjustments:
   • The central bank might need to consider monetary and fiscal policy adjustments to address the challenges posed by currency depreciation and tightening liquidity. Ensuring a stable macroeconomic environment will be crucial for sustaining economic growth and development.